Would Catalonian independence bring benefits or economic meltdown?

Catalans go to polls Thursday in a vote that could decide the future for the region. Catalonia, one of Europe’s economic ‘mega regions’ is Spain’s powerhouse even though it only makes up 6.3 percent of its surface.

Spanish and Catalan flags during a gathering against Catalonia independence in front of the European Parliament in Strasbourg, France, October 24, 2017. REUTERS/Christian Hartmann REUTERS/Christian Hartmann

Its economy is worth €215.6 billion, one fifth of the Spanish total and provides more than a quarter of Spain's total output. In 2016, the region also absorbed €37 billion  worth of overseas investment, 25 percent of  the Spanish total.

RFI talked to economics professor Xavier Cuadras Morato of the Pompeu Fabra University in Barcelona to find out what the economic impact of independence would be.

Van der Made: How important is the Catalan economy for Spain as a whole?

Morato: It is the biggest region in economic terms. It provides 19 -29 percent of GDP and it is only 16 percent of the population so the GDP per-capita is relatively high. Catalonia - think about a country that is the size of Belgium, the population of Switzerland, the economic size of Finland with a per-capita income somewhere between the UK and France. In European terms it would be a relatively rich country.

Van der Made: How does the discussion on independence affect the economy?

Morato: Independence per se should not be that important for the economy. But there is a political conflict between those who favor independence and those who don’t. The political situation might affect the economy.

In a sense you could think about an independent country. The fundamentals of the economy right now indicate that this would be just another small European country. But there is a transition from the status-quo to the new situation. And this transition is politically very uncertain. And that creates all sorts of problems that might affect the economy.

Xavier Cuadras Morato, economist with Pompeu Fabra University Barcelona Jan van der Made

RFI: There have been reports of companies moving out of the region. How bad is it?

Morato:

This is very bad. Especially in psychological terms. There were about 3.000 companies that started the process of moving to other places. But “moving” is not really moving. It is just moving the legel domicile in another place.

Workers are not leaving yet. Value-added creation is not leaving - yet. Basically they move the legal address. It’s like going to the notary and saying that instead of sending the letters to this address, I want them to be send to another.

But according to our data, of all the companies that started this process, only 10 percent have completed the move.The rest still have time. There are three months to finish it, so we don’t know yet how many will do it for sure.

In terms of employment and income, this is not going to be noticed in the short term. But who knows. It may be that some of those companies start moving part of their production processes.

[But] for companies that operate plants it is more difficult _ moving a plant is very expensive. But other cases it may happen, we don’t know.

Van der Made: One of the complaints of the people who want full independence is that Catalonia pays much more in taxe than it gets from the central government. How valid is this argument?

Morato: Nobody denies that. Catalonia is a richer region, so people say "if you are richer, you should pay more". How much more, though? We can talk about that. The figures say that if Catalonia could collect its own taxes and then finance its public services by itself, it would have a surplus of 8 percent of the GDP, which is a lot of money. People who are in favor of independence say that in terms of costs and benefits of independence, this is the fiscal gain.

Van der Made: What would independence mean for the Catalan economy?

Morato: Full independence would basically mean that [Catalonia] would have control over fiscal resources and economic policy. So this is the main gain in economic terms. Full control. Many people have complained that economic policy designed for the whole of Spain is not really adapted to the needs of Catalan citizens and companies.

One example [is with] transport and infrastructure. The obsession of the government in Madrid to have high-speed trains from everywhere in Spain to Madrid. This is probably not what an exporting economy needs. Your first priority is to have a fast connection to the main market, which is Europe. You don’t need so much to move around people, but to move around commodities to the market.

Probably what not only Catalonia, but also Valencia and all the east of Spain, that is the exporting part, they would need a different kind of infrastructure.

Van der Made: Spain is not happy about Catalan independence. They put [political leaders such as Oriol Junqueras and others] in jail.Others [such as former Catalan President Carles Puigdemont] fled to Belgium into voluntary exile. What kind of economic measures can Madrid take to discourage Catalonia to become independent?

Morato: What they have done so far. There has been a lot of pressure on firms to make a statement and to [pursue] these movements away from Catalonia. Basically their strategy is to increase the potential cost of independence by making things uncertain.

So in the best of the possible worlds, you could argue that this is a democratic society, people vote, politicians agree on what people vote [for] and then they should proceed with that.

This means that if Catalans want to be independent and want to remain in the EU and keep using the euro, in principle they should be allowed. It wouldn’t be costly for anyone, not for the rest of the EU, not for Spain.

Of course this makes things too easy for anti-independence supporters. Their main strategy is if you leave, you won’t be able to join the EU.There will be a problem because you won’t be able to use the euro and you will have to create your own currency which might trigger a financial crisis.

If you make this transition very difficult and very costly, people are discouraged, because they fear what may happen. Even if you are a supporter of independence, if the cost is very high, then you may be discouraged from pursuing this independence. This is the basic strategy here.